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How Truck Factoring Can Help Your Business Reach Its Full Potential

As a business manager or owner, fewer things are as frustrating in business as letting lucrative opportunities go by because you don’t have enough cash flow to take on new business. In fact, insufficient working capital as a result of low cash flow is deemed as one of the challenges business owners encounter to grow their company or even stay afloat. 

For companies with access to sufficient capital, this may not be a problem, but for smaller enterprises or new entrants into the market, a business can very easily grind to a halt. 

Having the growth of your company pegged back because of low cash flow can be really inconvenient especially if you have assets that you are unable to access such as outstanding receivables. 

For many trucking companies, low cash flow is a situation they are all too familiar with. As a trucking company owner, at times you might find yourself waiting for clients to fulfill their payments so you can take on new loads. 

But this doesn’t necessarily have to be the case. 

With invoice factoring, you can unlock money held up by unpaid invoices and funnel it into your working capital so you can stay in business. Keep reading for a detailed analysis of what truck factoring entails and how you can leverage it to take your business to new heights.

What Exactly Is Truck Factoring

As strange as it may seem, factoring happens to be one of the oldest forms of business financing. It has been practiced for nearly 4 millennia, dating back to as far as 2000 B.C.  

Traders in Mesopotamia used to practice factoring in its earliest forms when making cross-border business agreements. But what’s even more surprising is that not a lot of people know it exists or understand its purpose. 

If you’re reading this article and are one of those people, that’s all about to change. 

Truck factoring, or freight factoring, is a process that allows trucking companies to transform unpaid invoices for work that has already been done into instant cash. This happens when the trucking company sells its accounts receivables to a factoring company at a small discounted rate in exchange for an immediate cash injection. 

The Role of Truck Factoring in Sustaining Business Operations

The industry standard for clients to process full payments is 40 days but some clients take 60 or even 90 days to pay for a load. Sometimes, this can be too long a duration compelling trucking companies to seek business funding elsewhere from time to time. 

As the owner of a trucking company, you need to make sure your drivers’ salaries are paid, your office rent is paid, and your fleet of trucks is well-maintained to take on more and more loads, all the while trying to maintain a significant margin of profitability. All these things can be very hard to do when you have clients holding back on payments for several weeks. 

While traditional lending options such as bank loans can help you keep your doors open, they often take weeks or months to process which can be too long in certain situations. You might even find that after waiting for that amount of time, you were deemed ineligible for the loan.

Truck factoring, however, can help you dodge some portholes in your cash flow. Let’s take a closer look at how factoring services operate.  

How Truck Factoring Works

A truck factoring process starts when you invoice your client for a transported load. The outstanding invoice is what defines the factoring process and without it, there can be no transaction. 

The next step involves assigning the invoice to a factoring company. Choosing the right company will be key to business growth so try and factor with a reputable company that understands the volatile nature of the trucking business. 

If you’re using a factoring company for the first time, you might have to wait a bit longer than normal as your profile is assessed for approval. However, any subsequent factoring done after will be processed a lot faster. 

Depending on the company you choose to factor with and your business needs, you may have the option of doing low volume factoring or large volume factoring. Low volume factoring allows the trucking company to choose which invoices to factor while large volume factoring requires the trucking business to sell and sign all the invoices to the factoring company. 

You also need to understand that there are two approaches to factoring; recourse factoring and non-recourse factoring. 

With recourse factoring, the trucking business will have to buy back a previously sold invoice in case the client defaults on the payment. With non-recourse factoring, the trucking business relinquishes all liability to the factoring company. Although a tad more costly, non-recourse factoring is best suited for small businesses trying to avoid bad debts. 

Once the carrier has selected which invoice(s) they are going to factor, depending on the rate agreed to, the factoring company will pay a certain percentage of the value of the invoice (often between 80% and 90%). At this point, you should notify your customer that you have factored their invoice so they can at least have some awareness.  

When they eventually fulfill the payment, the factoring company then collects the money and deducts their fees before forwarding the balance to the trucking company. 

Value of Working With a Factoring Company

Trucking factoring is an excellent way for carriers to increase their cash flow needed to expand business operations. Here are a few benefits you can expect from truck factoring. 

1. An Easy Application Process

Invoice factoring simply involves a trucking business submitting its accounts receivables that it’d like to trade for immediate cash. Within 24 hours or 48 at most, a cash advance amounting to the near value of the factored invoices is made to the account of the carrier. 

However, for a factoring company to buy an invoice, they first have to do a credit check on the carrier’s client to find out their willingness to fulfill the invoice. 

2. The Payment is Quick and Hassle-Free

As highlighted above, businesses are frequently left in limbo as they way for customers to pay up. Late payments often compel trucking companies to source funding elsewhere as they wait for their clients to pay their invoices. Unfortunately, this can also take quite a long time. 

Invoice factoring solves this issue by providing instant cash in a matter of hours, empowering the trucking company to accept new business without any setbacks. Timing, after all, is everything. 

Traditional lenders also often require the loanee to meet certain requirements to qualify for a loan. But with factoring, carriers can get a cash advance even if they have a poor credit rating or are in debt. 

3. Trucking Companies offer Fuel Cards and Advances

Another overlooked benefit to working with factoring companies is that they help carriers save good money in fuel costs by providing fuel discounts at certain truck stops and gas stations across the country. Some factoring companies even provide fuel cards that carriers can use to pay drivers’ wages by cash withdrawal. 

Fuel cards and advances are also a great way for carriers to monitor and control how much they’re spending on fuel. 

4. Helps the Carrier Focus on Expanding Business Operations

Perhaps one of the core benefits of working with a factoring company is the peace of mind that comes with it. 

With invoice factoring, the owner of a trucking business can direct their full attention towards growing other functions of the business such as hauling more loads or buying more trucks rather than worry about where the money is going to come from. 

Since the factoring company takes over the debt collection aspect of the business, the owner/manager is left with much less to worry about. 

5. Protect the Trucking Company From Bad Debt

Any experienced manager or owner of a trucking company will tell you that at some point, they have come across clients who have been unable to make payments. Unfortunately, this leaves them in a tight position since they need the payment to take on more business. 

Non-recourse factoring, as referenced above, can be of great benefit to a carrier who simply can’t afford to incur a bad debt. In such a scenario, it is the factoring company that will absorb all losses while also paying the carrier any balances due as per the factored invoice.  

Understand the Needs of Your Trucking Company Before Invoice Factoring 

Invoice factoring will help you bridge the gap between the money you’re owed and the money you intend to make. 

However, while invoice factoring promises immense benefits for freight companies, there are certain factors that you need to consider first before proceeding to sell your accounts receivables.

For instance, the needs of your trucking company should define whether or not factoring is ideal for you and what factoring program you should go with. 

Make sure you familiarize yourself with the invoice factoring rates in the market if you want to make the most out of your money. 

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